Federal Blog Part I: Budget Terms to Know for 2017

As a new congressional session opens this week and a new President will be sworn in on January 20th, there has been considerable discussion around sweeping changes that may be enacted this year. These changes could take place under a process called reconciliation (explained below). The most cited types of big changes that could occur through reconciliation are a repeal of the Affordable Care Act and tax policy changes. This blog is intended to highlight relevant federal budget terms and processes to assist budget officers and analysts as they monitor federal action for impact on state budgets: budget resolution, reconciliation, discretionary and mandatory spending, and debt limit.

The Budget Resolution

The foundation of congressional action on the federal budget is usually the budget resolution. The budget resolution “reflects an agreement between the House and Senate on a budgetary framework for the upcoming fiscal year, designed to establish parameters within which Congress will consider subsequent budgetary legislation.”[1] The budget resolution sets the topline spending limits, which are then subdivided for each of the subcommittees that handle program-specific budgetary allocations. More importantly for 2017, if Congress wishes to pursue an expedited process known as reconciliation, reconciliation instructions must be included in the budget resolution. The instructions direct individual committees to develop and report legislation under reconciliation. The budget resolution does not require the President’s signature. This would be just the second time since 2010 that Congress would pass a budget resolution.

Reconciliation

But what exactly is reconciliation?

Reconciliation is a process that aligns (or reconciles) existing spending, revenue and debt limit laws with current fiscal priorities established in the budget resolution.[2] Its principal focus has been deficit reduction. It is also an expedited process because it requires only a simple majority vote in the Senate to pass (no three-fifths filibusters allowed) and limits debate time in the Senate. Below are the multiple steps required for reconciliation:

Congress passes a budget resolution, which must include reconciliation instructions/directives to trigger the reconciliation process. These instructions contain specific requirements: they identify the congressional committees that must develop and report legislation; they set deadlines for the committees; they set a dollar amount of the budgetary change that should be included in the reconciliation legislation; and they set the time period the impact of the change is measured. Budgetary changes may be made to direct spending, revenue, and/or the debt limit.

The committees identified in the reconciliation instructions develop and report legislative language. If multiple committees have been directed to develop legislation, the respective Budget Committee in each chamber then packages the responses into an omnibus budget reconciliation bill.

After the committees report reconciliation bills, the Senate Budget Committee will then examine the bills to determine if any of the provisions are in violation of the Byrd rule. First adopted in 1985, the Byrd rule generally prohibits the inclusion of extraneous provisions in reconciliation bills, generally described as provisions unrelated to achieving the goals of the reconciliation instructions in the budget resolution.[3]

After committee action, the reconciliation bills advance to the House and Senate floors for consideration. As noted above, reconciliation bills have shorter debate limits on the Senate floor and a majority vote is all that is required for passage. If the House and Senate pass different versions, then the bills must be reconciled, most often through a conference committee.

Finally, the reconciliation bill advances to the President for signature. If the President vetoes the bill, both chambers would need a two-thirds vote to override the veto.

Discretionary and Mandatory Spending

There are three main categories of federal spending: discretionary, mandatory, and net interest. Discretionary spending is allocated and controlled through appropriations bills. Net interest income is the government’s interest payments on debt held by the public offset by interest income the government receives. Mandatory spending consists of budget outlays controlled by laws other than appropriations acts, typically provided in authorizing legislation; entitlement programs such as Social Security, Medicaid and Medicare make up the bulk of mandatory spending (also called direct spending). In fiscal year 2016, combined outlays for Social Security, Medicare and Medicaid were equal to 48 percent of federal spending [4] while total mandatory spending accounted for an estimated 63 percent of total federal spending.[5] The reconciliation process can address changes in mandatory spending, with the exception of Social Security.[6]

Debt Limit

A key deadline regarding debt will also be reached in early 2017, as the current debt limit suspension expires on March 16. The limit was suspended in fall 2015 as part of a budget deal negotiated by former House Speaker John Boehner (R-OH). In order to avoid a default, the cap will need to be raised or suspended. However, the Treasury Secretary can use “extraordinary measures” to push the deadline further into the calendar year.[7] In the past, some fiscal conservatives in Congress have preferred to pair debt limit increases with deficit reduction plans (an example is the Budget Control Act of 2011, P.L. 112-25). It is unknown what action the incoming Congress will take to address the debt limit in March.

In monitoring the new congressional session, it is important to watch the budget resolution first, to see the reconciliation instructions. NASBO staff will continue to monitor federal action under the new Congress and President, and will send updates to members via the Washington Report, Health Care Update, and other publications. Please contact us if you have any questions about specific programs, proposed changes, or other federal actions.